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Why 800,000 HBO Now Subscribers Isn't That Disappointing

Analysts were expecting between 1 million and 2 million subscribers, but HBO fell short.

HBO Now hasn't been a huge hit with cord-cutters. During Time Warner's (NYSE:TWX.DL) fourth-quarter earnings call, HBO CEO Richard Plepler told analysts that the over-the-top streaming version of its premium network has about 800,000 subscribers 10 months after launching last April. Analysts were expecting between 1 million and 2 million subscribers at this point.

Comparatively, Netflix(NASDAQ:NFLX) added 5.6 million U.S. subscribers last year, bringing its total to 44.7 million. But even though those 800,000 HBO Now subscribers are just a blip on the radar for Netflix management, HBO isn't discouraged. "We are just getting started," Plepler told investors. "I think we are going to make a lot of progress as we put new content on and get onto new platforms."

A bit more contextThe comparison between Netflix's subscriber numbers and HBO Now's subscriber numbers isn't exactly fair. HBO Now's market is much smaller than Netflix's. While Netflix targets every high-speed Internet household in the world, HBO Now targets broadband-only households in the United States. With around 100 million households still subscribing to traditional pay-TV, HBO Now's market is only around 5 million to 15 million households.

When HBO launched HBO Now, Plepler said there are "10 to 11 million broadband-only homes in the United States. ... That was just too big an audience for us not to go after." In terms of market penetration, HBO Now took nearly the same percentage of its smaller market as Netflix took of its larger market (around 80 million households) in 2015.

Keep in mind, HBO Now isn't the only way to subscribe to HBO, whereas Netflix only has one option. Including its pay-TV subscribers, HBO added 2.7 million subscribers last year between HBO and Cinemax. That brings its total to around 49 million combined domestic subscribers -- on par with Netflix.

HBO Now expects to do better this yearPlepler believes that extending the service to new platforms and adding content created specifically for the streaming service will boost subscribers in 2016. When HBO Now launched, it was exclusively available to Apple device owners for three months. Meanwhile, pay-TV operators have been slow to adopt the service, with just two bundling it with their Internet service packages.

Plepler pointed to new content coming from Jon Stewart, Bill Simmons, and VICE aimed specifically at the streaming audience. Daily content like those planned not only helps attract subscribers but also keeps them subscribed throughout the year. Unlike Netflix, HBO releases all of its best series around the same time. Many believe there's pent-up demand for HBO Go for Game of Thrones fans waiting to subscribe until April.

HBO Now will also extend to more platforms this year, including Xbox and PlayStation, which the company says account for over 20% of HBO Go streaming. It also plans to ramp up marketing efforts around HBO Now.

But those marketing efforts have already proved expensive. While HBO grew revenue year over year last quarter, its operating income declined slightly. In the Time Warner's earnings release, it noted "The growth in expenses was mainly due to higher marketing and technology costs related to HBO Now." Of course, HBO and parent company Time Warner are profitable enough to float additional marketing expenses as HBO Now grows its subscriber base.

HBO Now isn't off to the start analysts expected, but it's doing just fine when you consider the market it's going after. As broadband-only households grow, HBO Now's addressable market expands, and it should see a consistent increase in subscribers. Meanwhile, Netflix investors should watch out how HBO's increased content and marketing spend on HBO Now impacts its already slowing domestic subscriber growth.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy